Payroll is generally considered a series of accounting transactions centered around making payments to employees for services rendered. In addition to calculating a basic hourly wage or salary for an employee, an employer calculates as gross pay any commission, bonuses, vacation pay, sick leave, or other compensation. The employer is also responsible for withholding various debits from the employee's gross pay, including income tax, other taxes (such as social security and Medicare), health insurance, union dues, pension plan contributions, and other deductions.
After the appropriate deductions are removed from the gross pay, the employee is paid the remaining amount, known as net pay. The net pay is typically disbursed to the employee in the form of cash, a handwritten check, a printed check, as a direct deposit into the employee's bank account, or some other form of electronic transfer. Along with the disbursement of payment, the employee may receive a pay stub detailing the gross income as well as the deductions for the current pay period. The pay stub may also include year-to-date totals for important items on the paycheck, such as gross pay, income tax withholding, social security withholding, Medicare withholding, deductions, and other details.
In addition to calculating and paying employees' net income, the employer is also responsible for transferring deducted amounts from employee paychecks, as well as making additional monetary contributions, to the appropriate organizational (i.e., governmental) bodies. For example, the employer must send portions of the employee's withholdings and any employer matching contributions to: (1) the Internal Revenue Service (IRS) and state agencies as tax payments, (2) the insurance plan administrator for the group health care plan to which the employer is enrolled as health insurance payments, (3) any retirement plans, such as 401k plans, offered by the employer (including matching funds) as funding payments, and (4) any other entity for payment of any additional expenses.
In order to perform certain functions, such as electronic filing and payment of taxes, electronic payment of insurance fees, electronic payment of association fees and dues, and other business-related transactions, the employer must enroll with one or more organizational and/or governmental bodies. For example, an employer must enroll with the IRS for electronic filing of tax returns, with the Electronic Federal Tax Payment System (EFTPS) for electronic payment of taxes, and sometimes with one or more state tax agencies for electronic filing and electronic payment of state taxes. In addition, enrollment for electronic filing and electronic payment at a particular tax agency is often separate. Consequently, the employer may repeat the enrollment process at multiple agencies in order to access certain functionalities of the agencies, such as electronic filing and payment.